depreciation

Depreciation

The accounting practice of spreading the cost of a long-lived asset across the years it'll be used, instead of expensing the whole purchase up front.

When you'd see it: Capital expenditure (capex) discussions, financial statements, earnings reports. A company buys a $10M factory expected to last 10 years and recognizes $1M of depreciation expense each year instead of a single $10M hit in year one. Shows up as a line item on the P&L and reduces taxable income.

Why it matters: Depreciation is the bridge between cash-out (a big purchase) and the gradual economic reality (the asset getting used up over time). It also explains why a profitable company can have very different P&L and cash flow numbers — depreciation is an expense that doesn't actually move cash. That gap is one of the most common adjustments in EBITDA.

Common mistakes: Thinking depreciation is the same as the asset losing market value. It's an accounting allocation, not a market price. A fully-depreciated machine on the books can still be worth a lot — or nothing — in the real world. Depreciation also has nothing to do with whether the asset is wearing out; it's a chosen schedule, usually tied to tax rules.

Related EBITDA, P&L